Informist, Tuesday, Jan 11, 2022

MUMBAI – While the implementation of the Basel-I capital had triggered an unfavourable reaction from investors, the fact that Basel-II and Basel-III norms led to a rise in stock prices of banks suggests that implementing these global regulations had a favourable impact on the banking sector in the long run, according to a Reserve Bank of India working paper.

The paper, titled 'Stock Price Reaction on the Announcement of Basel Implementation: Evidence from Indian Banks', is part of the working paper series in which RBI officials often carry out research collaboratively with other experts.

The paper is authored by Gaurav Seth, Supriya Katti and B.V. Phani. Seth is an assistant general manager at the central bank, while Katti is a project scientist and Phani is professor at Indian Institute of Technology, Kanpur.

"The policy decisions with respect to Basel II and III, in general, received a positive reaction with small deviations in some of the event windows in the short run. The multivariate analysis does not show any significant impact of bank specific characteristics on the market performance of various events confirming the strong announcement effect," the paper said.

It added that investors showed confidence in the RBI's policy decision of aligning Indian bank regulations with global best practices of Basel capital adequacy norms.

This was in sharp contrast to the Basel-I scenario, when Indian banks were not prepared to raise the capital to 9%, and led to an overreaction from markets, which were largely pessimistic. But the long-term gains and the experience from this event meant banks were better prepared for the subsequent changes in capital norms under Basel-II and Basel-III.  End

Reported by T. Bijoy Idicheriah

Edited by Avishek Dutta

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